Build to Rent – Overview of the evolving housing landscape

The housing question has always been a complex one and over recent years there has been a seismic shift in housing policy with the intention of finding a solution to plug the yawning gap left by a shortfall of homes. Whilst it is not claimed it will be the panacea, Build to Rent (BtR) has been offered as a solution and we take a look at how this sector has evolved.

Microeconomics

As a result of the growing affordability problems of homeownership in the UK, there has been a noticeable cultural shift which has given way to the rise of what is known as “Generation Rent”. It is predicted that by 2021 the proportion of households in rented accommodation will increase from 21% to 24% 1. Along with the new found credence in the rented tenure, there is a new philosophy emerging – individuals are placing a greater emphasis on experiences, mobility and lifestyle, and they are prepared to pay a premium for such standards of living.

Despite the growth in demand for the rented sector, there remains a shortage of supply of high quality, professionally managed rental accommodation. The buy-to-let model falls short of the mark, as it is ultimately designed to drip feed units to the market to maintain the rate of sales and increase sales values.

In response to the housing issue, the Government launched the BtR Fund in 2012 as part of a series of initiatives aimed at increasing the supply of high quality homes and bringing together policy-makers, developers, housing associations and institutional investors to increase the status and accelerate the development of BtR.

Policy support

Since 2012, the government has reinforced support for BtR developments through various policy changes. In 2017, the Government White Paper “Fixing our Broken Housing Market” set out plans to reform the UK housing market with BtR as one of the focused sectors. More recently, the National Planning Policy Framework (NPPF), launched on 5 March 2018, recognised BtR as a potential contributor to solving the housing crisis. With the Government’s aim to deliver 300,000 homes a year by the mid-2020s, the NPPF seeks to provide a “comprehensive approach for planners, developers and councils to build more homes, more quickly, in the places people want to live” 2.

Investors have reacted positively to the government initiatives in the BtR sector and it is reported that the total capital committed in Britain increased by 22% to reach £2.4 billion in 2017 with 41% from North American investors 3.

The Investment Opportunity

The BtR model is familiar in countries like the USA where the equivalent of the BtR sector is known as “Multifamily Housing”. Multifamily Housing has been evolving for over a decade and is now a well-established asset class in the USA which offers institutional investors diversification from other traditional real estate sectors. The growth in investment in the UK is partly attributable to the USA investors who are bringing knowledge from their domestic market, most notably USA owner and operator Atlas Residential, which announced in October 2017 that it wants to invest up to £3 billion in a portfolio of 10,000 UK BtR developments.

It is easy to understand why investors are seizing upon the market opportunities. According to the Office for National Statistics average rents have increased by 2.2% per year since 2011 compared with the average CPI rate of 1.6%. For investors who want to diversify their real estate portfolio, the BtR model offers robust stable and less volatile returns over the long term compared with other real estate sectors and asset classes.

It is reported that the number of BtR developments completed, in construction or planned in the UK has risen by 30% to 117,893 4 and current industry estimates indicate there could be around £50 billion to £70 billion investment in to the BtR sector generating an extra 15,000 homes per annum.

Conclusion

Whilst such BtR developments are still in their infancy, microeconomics, policy changes and investor appetite have encouraged growth in the BtR sector. The question now is not whether BtR will evolve, but how it will evolve and how quickly.

At our “Developing Connections” seminar on 23 May 2018 we will look at how the BtR sector is developing from “Design to Delivery”.

References

1. According to the Annual Report 2017 “Multihousing 2017” by Knight Frank
2. Government press release dated 5 March 2018 “Prime Minister launches new planning rules to get England delivering homes for everyone”
3. Property Wire dated 7 March 2018 “Build to Rent investment now firmly established in Britain”
4. The British Property Federation  commissioned report “Unlocking the Benefits and Potential of Build to Rent” dated 7 February 2017 research conducted by Savills Research and Economics teams, with the London School of Economics